(Reuters) - The euro fell to a 10-year low against the yen and its lowest in nearly a year versus the dollar on Thursday, with investors nervous ahead of an Italian bond sale.

Trading was thin, with individual orders causing exaggerated moves. Market participants awaited Italy's sale of up to 8.5 billion euros of bonds, including new tranches of three- and 10-year benchmarks.

Yields halved at auctions of short-term Italian debt on Wednesday, providing some encouragement, but Thursday's auctions were seen as a much sterner test, with markets wary the euro zone's debt crisis was far from being resolved.

The auction yesterday was good but today's will be more of a barometer for what appetite will be at the start of next year, said Carl Hammer, currency strategist at SEB in Stockholm.

Italy have a massive refinancing need early next year and markets are a bit worried about it.

SEB forecasts the euro will fall to $1.25 by the first quarter of 2012. However, Hammer said year-end flows tend to be negative for the dollar, and this could temper euro falls versus the U.S. currency before the New Year weekend, while traders cited talk of euro zone exporter demand to buy euros.

The euro was down 0.1 percent at $1.2922, off a low of $1.2887 in Asian trade. That was its lowest level since January 10, when the euro hit its 2011 low of $1.2860.

Against the yen, the euro hit a 10-year low of 100.33 yen on the EBS trading platform, driven by selling from Japanese retail investors and exporters, with moves amplified in poor year-end liquidity.

There was market talk of an option barrier at 100.00 yen, suggesting the euro could draw support from demand from options players just above that level. However, its falls may gain momentum if that level is breached, with one trader saying there were large stop-loss euro offers at 100.00 yen.

Analysts said the euro was likely to stay vulnerable to further falls as the debt crisis in the region remains acute.

Nobody sees anything on the horizon that could be mildly positive for the euro, said Rob Ryan, FX strategist for BNP Paribas in Singapore.

The euro fell on Wednesday, with investors spooked by European Central Bank data showing euro zone banks deposited a record 452 billion euros with the central bank.

Signs banks were hoarding cash came just days after the ECB provided them almost half a trillion euros worth of three-year loans at cut-rate prices to encourage lending. The new data suggested European banks are still distrustful of lending to each other, preferring to deposit money with the ECB.[ID:nL6E7NS14D]

The euro's drop helped lift the dollar to 80.729 .DXY versus a basket of currencies at one point, near an 11-month high of 80.730 hit in mid-December. It was last at 80.524.

Against the yen, the greenback eased 0.25 percent to 77.71 yen.